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Weekly rollup | May 02-08 2022

Stocks Mentioned: Credit Acceptance Corp (CACC), Weyerhaeuser Co (WY), Ardmore Shipping (ASC), Scorpio Tankers (STNG), Dorian LPG (LPG), BW LPG (BWLPG.OL), Western Forest Products (WEF.TO), Hafnia (HAFNI.OL)

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May 02 2022

China is now testing packaged food for covid. As absurd as it gets. The outcome is going to be another Great Leap Forward. Lean hogs are now below their 100 DMA, even as the agri commodities look good chart-wise.

Credit Acceptance Corp (CACC) is reporting earnings after the close today. I've written the reasons for the short trade in the August 15 AAO newsletter (see below for the report) and initiated a short position twice - once last September which got stopped out for a loss and once in Jan which is still ongoing. I added to my short position today because I expect higher loan loss provisions to eat into net income, maybe even lead to the company reporting a net loss. Consensus estimate EPS is $12.37. The stock has been strong because record collections led to record earnings. Even management doesn't expect that scenario to last and neither do I.

Management commentary on the Q3 2021 earnings call: "But collections have been very strong, as you have seen in our last couple of releases. It doesn't really seem logical that those will continue forever. When they falloff, I think it's harder to predict. But I would expect at some point collections to go back to more normal levels.”

I think collections should have started falling off by now, given that there are no more stimmy checks or unemployment benefits headed the way of this company's borrower base of sub-sub-prime consumers.

May 03 2022

CACC reported GAAP earnings of $214.3 million (EPS: $14.94), with earnings up 6% yoy. The magic of buybacks (16% reduction in share count) increased EPS growth by 26% yoy. The company changed its forecast methodology, which increased forecast net cash flows by $95.7 million and reduced provision for loan losses by $70.6 million. This change was implemented because the company thinks it has enough data to account for the increase in default risk from the lapse of covid stimulus checks and enhanced unemployment benefits.

While the market is focused on headline figures, few points to note:

  1. Revenue increased only 1% vs Q1 2021.

  2. The loan book shrunk 1.6% q-o-q. Adjusted for the lower estimated credit losses, the loan book actually shrunk 3.1% q-o-q.

  3. Loan volumes, number of active dealers, total dollar volumes of loans all declined significantly (10%+) and the trend continues through April.

  4. The company added additional leverage to a shrinking business, with liabilities increasing $182.8 million and assets stagnant even after decreasing loan loss provisions by $142.7 million. The added leverage makes the equity sliver even thinner, a pretty dangerous position to be in for a sub-prime lender.

To sum up, stay the course on the short position. The company will be forced to acknowledge the problem at some point, and not have the cash to paper over it with share buybacks. When this blows up, it'll blow up worse than Netflix after Q1 results.

My initial short and the earnings short are both active trades for me. I don't see anything in these results that warrant covering my earnings trade. Maybe I'll change my mind once I peruse the earnings call transcript, but I doubt it.

The observation here is that gold bottoms at the beginning of the rate hike cycle. If so, the lows are behind us for the next rate hike cycle. The observation is not a prediction, nor is it something to trade on.

May 04 2022

April saw record-breaking monthly net outflows of 14,327 BTC from BTC ETPs, surpassing the previous monthly outflow record from July 2021, further illustrating the sad state of the market this month.

A study I did during my days at TDV, not updated since Aug '20. Thinking about the Incrementum chart from yesterday, I like the odds of a long gold trade going into the Fed rate hike announcement this afternoon, with a loose stop at the Jan low of $1785, to be quickly moved up post the announcement if gold does perk up. Long MGC

From WY Q1 earnings call: "March housing starts totaled nearly 1.8 million units on a seasonally adjusted basis, the highest monthly level since 2006. Housing permits in the first quarter averaged nearly 1.9 million units on a seasonally adjusted basis, surpassing last quarter by 7% and surging to its highest quarterly average since before the Great Recession.

We continue to see favorable activity from large professional projects in the first quarter, representing a continuation of the strong demand signal we saw from this segment in 2021. Demand from the Do-It-Yourself segment softened modestly in the first quarter, largely driven by concerns over the return of near record high lumber prices.

Overall, our long-term outlook for repair and remodel continues to be favorable, supported by an aging housing stock, rising home equity, and historically low supply of new and existing homes for sale".

I like this sector but am not going to trade it given that I have other priorities. I like the WFG trade and WOOD ETF for a long-term position but won't be providing ongoing guidance until I get more actively involved in trading the timber and paper stocks.

Ardmore Shipping (ASC) is trading at $7 pre-open and will be announcing Q1 results today pre-open. The stock has gone parabolic on the daily chart. While the technical exit point is around $6.2 using a parabolic stop-and-reverse (PSAR) stop, I'm going to take profits at $7 if I can, maybe even exit my position completely ahead of the earnings release. While rising vessel values increased the NAV per share to $11.13 as of year end 2021, let's not forget that this company posted a net loss of $38.1 million for 2021, up from a net loss of $6 million in 2020 and net loss of $22.9 million in 2019. In the last 5 years, the company has lost a whopping $122.4 million. ASC was last profitable in 2016, barely scraping together $3.75 million in net income on revenue of $164.4 million, for a profit margin of 2.28%.

I like asset plays and love buying stocks in an uptrend trading at a discount to NAV. But shares can get smacked hard if the company reports a bigger than expected net loss Analyst consensus EPS estimate is negative 17 cents and average price target is $6.6.

Also, there's a chance the company uses the strength in its share price to streamline its capital structure, issuing preferred equity to lower its debt burden, as it did last year. I just don't see the parabolic move lasting post the earnings release, unless some blockbuster acquisition deal is in the works (possible). I'm taking profits, only thing in question is whether or not I completely exit.

ASC reported a net loss for the quarter of $7.9 million, or 23 cents, higher than the consensus estimate but better than Q1 2021 net loss of $8.5 million or 26 cents. Product tankers and shipping in general are having a massive up day today. Oil is up 4% and natural gas is up 5.5%. Looking at market strength today, it's easy to get carried away and think the good times will last forever. But let's not forget we have seen panic since 4/21 and the primary trend is no longer bullish for broad markets. Given that backdrop, I'm happy to sell into strength and sit on cash. I am closing the entire ASC position today at or around the open.

Sold my entire ASC position at $7.11 on average, following that up with a short trade on Scorpio Tankers (STNG). Scorpio Tankers is run by one of the worst management teams in the shipping business, comparable to Iamgold ($IAG) in the gold space. Worse, STNG insiders enrich themselves at the expense of the public company through a complicated web of related party transactions that suck capital out of STNG. The Scorpio Group once used to own a dry bulk shipping business called Scorpio Bulkers. They exited dry bulk at the very bottom of the market in order to focus on building offshore windmills. The revamped company, which calls itself Eneti ($NETI), is down 70% over the last year, while dry bulk has made a roaring comeback.

To make matters worse for STNG, their string of losses and meagre working capital surplus, combined with a debt to equity ratio of 1.7x, put them in the position of having to either sell vessels to raise cash, or issue equity to improve their capital structure. Any strength in the share price is going to be a good excuse to announce a deal, which given their history is bound to be value destructive. I don't see how the share price can continue its parabolic up move.

Sell short STNG at ~$26.8 with a 3 ATR stop.

May 05 2022

ASC: Jonathan Chappell reiterates OUTPERFORM and raises to $9 (8). “ASC’s full spot market fleet is set to benefit directly and meaningfully from these market shifts, and with the light share count, the EPS, NAV, and eventually dividend upside is likely to be material.”

Not that he's wrong. I just think the path to $9 or even $11 is not straight up from here, the way it has been from $4.4 last month to $7.39 at the peak today.

Dorian LPG (LPG) reported 90 cents in EPS for nine months ended Dec 2021 and will commence a $100 million share buyback program. This on top of the $1 in special dividends paid out in Sep '21 and Jan '22. Trades at 0.52x book value. Stock was down for the day on results announcement so I held off. But with results out of the way, the company can now commence the buyback and that's going to be a major catalyst, especially considering the market cap is a mere $489M. I'd use a stop just below the 1/25 low of $11.19 (it shouldn't go that low when the buying volume kicks in). This is purely a technical trade, I have no fundamental view on VLGC rates.

We put this trade on on 2/4 and today the company announced a $2.5/share dividend with ex-dividend date of 5/16 and payable on 6/2. That's a $100.3 million return of capital to shareholders, on a company which still only has a market cap of $665.9 million. Book value is around $23/share (current share price: $16.59 after-hours). No word on whether or not the authorized share buyback of $100 million has been fully utilized, so assume it's still active.

Dorian LPG (LPG) owns 20 VLGC vessels, 18 of which were built in 2014 and 2015, one in 2016, and one older vessel built in 2007. All newbuilds are eco-design and 12 are scrubber fitted. The company has 4 vessels on time charters expiring in Q4 this year or early next year, 1 on time charter expiring in Q2, and the rest are all exposed to the spot market. There are an additional 2 chartered-in vessels, both exposed to the spot market. Spot revenues decreased by 24% for the nine months ending Dec 31, 2021 as compared to Dec 2020. The reason for buying this stock is simple – growth in earnings as VLGC rates rise. Disruptions in the nat gas market should fuel interest in LPG and increase ton-mile demand for the fuel.

We own Dorian and BW LPG (BWLPG.OL) to play this trend, with the latter being the bigger player and Dorian adding extra alpha.

Western Forest Products (WEF.TO) market commentary: "As we look ahead, we expect the strong North American lumber market fundamentals, which have driven lumber pricing over the last few years, to continue. The combination of low existing home for sale inventories, improved housing starts, and historically attractive mortgage rates should support higher lumber consumption. We believe the strong demand fundamentals combined with lower lumber supply from British Columbia and the potential for global lumber supply disruptions will create a supportive pricing environment for lumber over the near term.

We expect sawlog markets to remain strong due to a combination of reduced supply and strong demand while we expect pulp log pricing to trade in a narrow band due to limited market competition. Sawmill residual chip pricing is expected to remain strong supported by higher Northern Softwood Bleach Kraft pulp pricing in China.

Long-term, we believe that strong North American housing market fundamentals will support lumber demand and pricing, above trend levels. An aging housing stock, a housing deficit stemming from years of underbuilding, the influence of work-from-home arrangements on the repair and renovation segment, and the growth of mass timber construction are expected to continue to drive growing demand for lumber. At the same time supply has been reduced due to the impact of permanent production curtailments resulting from Mountain Pine Beetle in the BC Interior."

The company reported revenue of $359.6 million for Q1 2022, with revenue growing 10% sequentially and 13% yoy. Realized lumber price rose 24% yoy. The company bought back 10% of shares outstanding for C$60.7 million, buying shares at an average price of C$2.07 per share, and has raised its quarterly dividend to 1.25 cents (last traded price: C$2.21, market cap: C$719.4 million).

The lockdowns in Shanghai have heavily impacted port loadings. Inventory re-stocking demand is bound to increase with soaring inflation and logistics constraints (once Shanghai opens up, congestion at Long Beach will spike). The operations management concept of just-in-time inventory is giving way to higher re-order levels, a function of increasing demand and lead times, plus higher safety stock, since inflation is only going to make inventory more expensive to purchase in future.

Freight recession? No way in hell. I'm as bullish as ever on the container trade and KNX.

Hafnia (HAFNI.OL) raised US$100 million via a private placement of 37.6 million shares at NOK 25 per share. No surprise that the loss making tanker company is using the market strength to its advantage. We exited the trade at just a smidge below the share offering price, based purely on valuation and the price action. The institutional interest in Hafnia makes me keen to re-enter the trade if we get a good entry, but for now, I'm out due to the shareholder dilution and valuation concerns.

May 07 2022

This craziness in China means shortages are going to be long lasting as supply chains break and manufacturing bases shift to better jurisdictions. As always, vessels stuck for longer at Shanghai is bullish for container rates.

May 08 2022

The Qatar news made waves in 2019 when capacity was ample. The Chinese order goes into an already backlogged shipyard sector in 2022. The booming demand for LNG and containerships ensures the orderbook stays low for dry bulk and tankers.

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